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Washtenaw Contractors Association – EPIC ProgramMatthew T. Jane • Matthew R. Rechtien March 10, 2016

Managing the Construction Lien Process:A Primer on the Lien Act and Recurring Pitfalls

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The Problem• Have you ever done work and not gotten paid?

– Construction is volatile business; companies come and go.– Work is often on credit, for promise to pay.– Fragile reliance on cash-flow, i.e., “upstream” money to pay “downstream”

obligations.– Parties in “stream” may be shells, with no real capitalization or “collectability.”

• Significant risk party you contracted with, will not pay, even if you complete work.• Parties providing work produce real value to property.• Through careful contracting on each project, possible to allocate risks, but

transaction costs would be high.

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The Solution

• The Lien Act was enacted in 1980 (effective 1982).• Complex system of “mechanic’s liens” existed before.

– Nearly all states have analog.• Purposes:

– To provide procedures through which:• Builders improving property on credit get security for payment.• Owners to protect themselves against double-payment.

– “Remedial statute … liberally construed to secure” its “beneficial results” –“substantial compliance”

• Avoids “reinventing wheel” of risk allocation and payment processes.• “Oils the gears” of commerce; reduces transaction costs.

– Creates automatic rights and obligations, implied by law.

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Why You Should Protect Your Lien Rights• Preserving and enforcing your lien:

– Provides security for the debt owed– Provides you with bargaining leverage– Allows you to bring other parties to bear

against debtor, e.g., owner can pressure architect or contractor

– May be your only means of payment if the party you contracted with goes out of business, or bankrupt, etc.

– Gives you avenue to seek payment from real party in interest.

• But, requires knowing & following process.

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A Construction Lien:

• Lien Act gives improvers of property a lien on property.

• Black’s: a lien is “[a] legal right or interest that a creditor has in another’s property, lasting usually until a debt or duty that it secures is satisfied.”

• Most common lien: A mortgage. • Arises automatically; lost if not perfected.

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Creation of the Lien

• Creation is, by law, automatic.• “Each contractor, subcontractor, [or] supplier …

who provides an improvement to real property has a construction lien upon the interest of the owner … “

• Real Property: buildings, heavy machinery, etc.

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A Construction Lien Protects:• Anyone who provides an improvement to

real estate pursuant to a contract• Contractors• Subcontractors• Suppliers• Laborers• Examples:

– Construction management– Design professionals – Equipment rental

• But not lawyers, accountants, marketing

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Important Definitions

• Improvement – Result of labor or material provided by contractor, subcontractor, supplier, or laborer pursuant to contract

• Contractor – Anyone who has a direct contract with Owner who provides improvement

• Subcontractor – Engaged by contractor – no direct contract with Owner• Supplier – Provides material (no labor) – no direct contract with Owner• Laborer – Provides improvement through personal labor pursuant to contract with

contractor or subcontractor • Project – the aggregate of improvements contracted for by the contracting owner –

defined by the Notice of Commencement • Contract – means a contract, of whatever nature, for the providing of improvements

to real property, including any and all additions to, deletions from, and amendments to the contract

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Limitations on Lien Rights

• Value:– Capped at “the amount of the lien claimant’s contract less payments made on

the contract.”– Consequential damages, i.e., delays, etc., not typically included.– The “amount of lien claimant’s contract” could include “extras,” interest and

time/price differential charges.– Sum of value of all liens attached to properly cannot “exceed the amount the

owner … agreed to pay the person with whom he or she contracted for the improvement … less payments made … pursuant to contractor’s sworn statement or waiver of lien …”

• Limited to interest of Owner/Lessee described in NOC; tenant improvement problem.

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Overview of the Perfection Process

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Record and Post Notice of

Commencement

First Actual Physical Improvement

First Date of Work

Service of Notice of

Furnishing

Sworn Statement

Last Date of Work

Filing Claim of

Lien Lawsuit

20 Days 90 Days 1 Year 15 Days

Service of Claim of Lien

Notice of Commencement Record and/or post prior to Commencement of Construction

Notice of Furnishing Service within 20 days of first date of work

Sworn Statement When requested, when payment requested, but always prior to lawsuit

Claim of Lien File within 90 days of last date of work

Service of Claim of Lien Within 15 days of filing of Claim of Lien

Filing of Lawsuit Within 1 year of recording of Claim of Lien

Construction Lien Timeline

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Notice of Commencement (Residential)

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Notice of Commencement (Commercial)

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Notice of Commencement

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Notice of Furnishing

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Sworn Statement

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Sworn Statement – When Required

• Contractor must provide to Owner:– When payment is due– When Contractor requests payment– Upon demand of Owner– Prior to filing lawsuit*

• Subcontractor must provide to Owner or Lessee:– Upon demand of Owner or Lessee– Prior to filing lawsuit*

• Subcontractor must provide Sworn Statement to Contractor:– When payment is due to the Subcontractor from the Contractor– When the Subcontractor requests payment from the Contractor

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Information Required in Sworn Statement• List of each subcontractor, supplier, or laborer

providing labor or material• Type of improvement provided• Total contract price• Amount already paid• Amount currently owing• Amount of laborer wages due but unpaid• Amount of laborer fringe benefits and

withholdings due but unpaid

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Information Not Required to Include in Sworn Statement• Material furnished by the contractor or

subcontractor out of his or her own inventory –not purchased specifically for performing the contract

• Information about contract of party completing the Sworn Statement, e.g. Contract between Owner and Contractor

• Balance to Complete (optional)

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Waivers of Lien

• Four types authorized and required by statute• Partial Unconditional –Progress payment not conditioned upon actual payment• Partial Conditional – Progress payment conditioned upon actual payment• Full Unconditional – Full payment not conditioned upon actual payment• Full Conditional – Full payment conditioned upon actual payment

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The Importance of Notices of Furnishings, Sworn Statements and Lien Wavers

• Notice of Furnishing lets persons upstream know who is performing work

• Sworn Statement lets upstream person know who is owed what (snapshot)

• Lien Waver ensures that person receiving payment cannot file lien as to amounts paid

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Claim of Lien

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Contractor Lien Requirements

• Include all amounts that you would claim in lien

• File Claim of Lien within 90 days of last date of work

• Serve Claim of Lien on Owner within 15 days of filing

• Serve Sworn Statement prior to foreclosure lawsuit

• Sue to foreclose within 1 year of recording of claim of lien

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Priority• Major issue when sum of liens < value of property.• All construction liens have same lien priority:

– Attach as of the first actual physical improvement, regardless of date recorded.• “Actual physical improvement” is an actual physical change in, or alteration of, real

property as a result of labor provided, pursuant to a contract …”– Alerts a person upon reasonable inspection of the existence of an improvement;

major source of battle.– Does not include preparation for alteration: surveying, soil boring and testing,

engineering planning, or supplies delivered to or stored at the real property. No visible notice that construction under way.

• Priority for Liens v. Other Recorded Interests.– Michigan is a race-notice statute – lien’s priority is subordinate to all prior liens of

which the lienor had notice (actual, or constructive [recorded or obvious]).– Construction lender’s mortgage.

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Special Rules for Liens Against Condominiums

Party Authorizing Work Location of Improvement Effect

Owner, lessee or others Unit or limited common element Only attaches to the unit where work was performed

Developer, residential builder, or principal contractor of a condo project

Work performed on common elements Attaches only to condo units owned by developer, residential builder, or principal contractor at time of lien filing

Association of Co-owners of condo units

Any improvement Attaches to each condo unit but only to proportional extent that co-owner of condo unit is required to contribute to admin. expenses per condo docs

Anyone Work performed on common elements Lien will not attach if work was not contracted for by developer, residential builder, principal contractor, or the condo association

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Right to Obtain Contract and Statement of Amount Due and Unpaid• Lien claimant may demand that an owner or lessee who contracts for an

improvement to real estate to provide a copy of the contract for the improvement between the Owner or Lessee and a written statement of the amount due and unpaid on that date on the contract

• Must be provided within 10 days after receipt of written demand• Failure to provide information after demand entitles lien claimant to actual damages

sustained due to the failure• Note that Owner or Lessee can request written statement from lien claimant – failure

to provide allows Owner or Lessee right to withhold payment to lien claimantuntil it receives information

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Special Protection for the Residential Owner• Lien will not attach to residential project to the extent payments have been made if

Owner files an affidavit with Court stating that Owner has:– Paid contractor for the improvement to the residential structure according to the

contract and the amount paid and attaching to the affidavit copies of the contract and evidence of payment

• No right to lien a residential structure unless the work is provided pursuant to a written contract containing the required licensure language and the lien claimant’s license number (if a license is required)

• Owner can bring an action to discharge a lien recorded by an unlicensed person and can recover their costs and attorney fees.

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Foreclosure• Suing to foreclose perfected lien is end-game.• Requirements:

– File in County Circuit Court where property is.– One-year strict limitation from recording of Claim of Lien. – Upon filing, must record and serve a notice of Lis Pendens (“pending litigation”).– Join all parties who have interests in property that could be impaired by

foreclosure, i.e., anyone whose title plaintiff is trying to beat.• Court examines all claims and defenses and to determine the amount due to each lien

claimant, or to any other party holding an interest in the property being foreclosed, as well as priorities of each.

• Reasonable attorney fees available to prevailing lien claimants, and to prevailing defendants if action was “vexatious.”

• Claimant can simultaneously sue for breach of contract, unjust enrichment, etc. • Successful plaintiff can obtain foreclosure judgment, with order to sell and distribute

proceeds – deficiency judgment.

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Common Issues• Lien claimant “manages” last date of work (punch list vs. warranty work)• Lien claimant alleges extras and other circumstances that increased the lien claim• Claim that “first actual physical improvement” predates recordation of bank

mortgage• Disputes over terms of contract• Public projects (no lien rights); bonding

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Common Issues• Is it a “lienable” project? Fixture?• Late service of NOF (within 20 days of first date of work)

– Effect – lien does not apply to work already paid by owner pursuant to sworn statement• “Safe harbor” - Unless subcontractor can show owner knew about subcontractor. Better late

than never

• Failure to timely record claim of lien (90 days of last work)– Total loss of lien rights; no substantial compliance

• Failure to sue within a year; no substantial compliance

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Matt Rechtienmrechtien@bodmanlaw.com(734) 930-2499

Matt Janemjane@bodmanlaw.com(734) 930-6898

• Representing owners, developers, architects, engineers, general contractors, construction managers, specialty, and other subcontractors

• Construction planning, contracts, risk management, litigation, arbitration, and mediation

• Construction team includes a Professional Engineer, a LEED AP accredited professional, members of the American Arbitration Association’s Construction Arbitration Panel